Translation exposure
What is translation exposure, and how is it different from transaction exposure?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Translation exposure is the change in what an overseas subsidiary's results and assets are worth when a group reports them in its home currency. It moves reported profit and equity, but no cash changes hands because of it. A lender cares first about transaction exposure — the cash a sale or a payment actually brings in or takes out — and tests a management explanation that a currency move hurt 'only on translation' by checking whether the cash agrees.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WHAT IT IS NOT
Translation exposure is not transaction exposure: translation changes the reported value of overseas results; transaction exposure changes the cash a contract actually produces.
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